Gold prices supported by U.S. fiscal debate

After rising 0.31% on Wednesday, the U.S. Comex gold futures tumbled by 0.94% on Thursday. The S&P 500 index and the Euro Stoxx 50 index weakened by 1.54% and 1.26% respectively in the past two days. Week-to-Thursday, the gold futures has dropped almost 1% while the Dollar Index has remained flat at around 81.1.

As the market expected, the Euro area fell into a recession with real GDP growth dropping 0.1% in Q3 after falling 0.2% in Q2 while the September industrial production fell 2.5%. Germany's and France's real GDP rose 0.2% while that of Italy and Spain declined 0.2% and 0.3% respectively in Q3. The Japanese government also downgraded its economic outlook for four consecutive months due primarily to the weakening external outlook.

In the U.S., both the New York and Philadelphia manufacturing indexes contracted in November. The unemployment claims ending the week of Nov. 10 shot up by 78,000 because of the aftermath effect of Hurricane Sandy, although real GDP growth may not be impacted in total in the next two quarters. The debate on the fiscal cliff has clearly weakened sentiments in the U.S. markets where the S&P 500 index dropped about 5% after the Presidential election. Last-minute brinkmanship could lead to a prolonged fiscal debate up to the U.S. debt ceiling deadline around mid-February 2013.

The weaker gold market prices on Thursday coincided with the release of the Q3 Gold Demand report by the World Gold Council. The report showed that global gold demand dropped 11% year-on-year to 1,084.6 tonnes in Q3 although the high base in Q3 2011 was a result of the uncertainty surrounding the U.S. debt ceiling debate. Physical demand weakened in Q3 with investment demand, which includes ETFs, total bars and coins, dropping 16% year-on-year in Q3. Indian demand rose 9% while Chinese demand weakened 8% as the Chinese economy slowed. ETF demand was the bright spot within investment demand, rising 56% from last year. Year-to-September, the central banks continued to purchase gold at a clip of about 100 tonnes per quarter.

The important data and events to watch include Ben Bernanke's speech in New York, the October U.S. housing starts data and the Bank of Japan interest rate meeting on Nov. 20 as well as the EU Summit and the EU-17 November flash manufacturing PMI index on Nov. 22.